Internationally-minded companies should have systems in place to ensure compliance with a vast array of foreign and domestic economic sanctions. That said: before Russia’s invasion of Ukraine, the topic of “economic sanctions” was often relegated to overworked supply chain managers (or the dark, dingy offices of…well, lawyers like us).
Fast-forward to the present: with apologies to Piper Chapman, sanctions are the “new black”. They are now considered critically effective weapons of economic warfare.
Unfortunately for our clients, compliance with sanctions has become exponentially more difficult. New sanctions seem to be issued almost daily, and those of other countries (e.g., the UK or the EU) only partially overlap with those of the US. To demonstrate this complexity: US governmental guidance (FAQs) on Russia-oriented sanctions (mean to simplify comprehension) runs to almost 14,000 words.
However, we only ever hear about what economic sanctions are being enacted…and not how economic sanctions are enacted. Thus, dear readers, join us on a trip into the world of economic sanctions to give you the basics of how these political trade tools work!
Economic sanctions operate as a barrier to trade and economic relations to achieve a variety of governmental objectives, such as:
- Diplomatic and political objectives, which may manifest in multiple manners, such as the economic sanctions against Russia in response to its invasion of Ukraine;
- National security objectives, especially those related to rogue states, terrorism, and weapons of mass destruction;
- Humanitarian objectives, such as economic sanctions against Chinese Communist Party officials of the Xinjiang Autonomous Region (who are accused of maintaining ethnic concentration camps and conscription regimes); and
- Law enforcement objectives, such as those against international drug syndicates and their members.
The term, “embargo,” is a commonly-used vernacular when discussing trade barriers and economic sanctions…but is actually not a legally operative term. Embargoes, generally speaking, are merely comprehensive economic sanctions regimes that effectively halt all trade and financial transactions. Good examples of this type of sanctions regime are the US “embargoes” against North Korea and Cuba (and, in the case of the latter, with the tragically-brief exception of 2015-2020 for little blessings like cigars). Almost all economic sanctions regimes are much less comprehensive and severe than “embargoes,” because they have specific foreign policy goals in mind (and, for that reason, target specific individuals, entities, transactions, or uses).
The legal framework for economic sanctions generally falls under the International Emergency Economic Powers Act (“IEEPA”). (This short blog will not discuss other agency sanctions, e.g., export controls under Commerce; visa bans under State; and anti-kleptocracy measures under Justice.) The IEEPA allows the President to “investigate, regulate, or prohibit” financial transactions or transfers of property by “blocked” individuals or entities. Once the President makes a U.S. foreign policy decision, the Office of Foreign Assets Control (“OFAC”, housed in the Department of Treasury) administers and enforces resultant economic sanctions regimes. OFAC first gains its authority through IEEPA, but then expands on it in most instances based on other statutes, regulations, Presidential proclamations, or Executive Orders.
Economic sanctions follow various frameworks: (1) country-based economic sanctions, which tend to be “embargoes” and target specific countries and individuals or entities ordinarily resident within that country; (2) list-based programs, or specially designated nationals (SDN) lists, which targets specific individuals and companies; and (3) non-SDN lists, which focus on narrow targets (e.g., specific activities or uses, industries, sectors, regions, or products).
U.S. persons must follow the restrictions and prohibitions outlined in a specific sanctions program. Often, OFAC permits otherwise sanctioned activity through exceptions known as “licenses.” General licenses are granted broadly to “whitelist” transactions that, for foreign and public policy reasons, have been granted clemency from the program. (This might include, e.g., humanitarian missions, medical supplies, or agricultural goods.) If a general license is not available, you may request a specific license to perform something otherwise prohibited. OFAC is not required to grant specific licenses, and for many sanctions regimes, submitting an application to OFAC is “presumed denied.”
In practice, sanctions regimes can help a country achieve its foreign policy goals through the imposition of catastrophic economic consequences. Consider recent sanctions imposed against Russia: at the time of writing, foreign investment has all but withdrawn, international trade has essentially been halted, the ruble (as a currency) has collapsed, and the country is at risk of a sovereign default.
In the United States, sanctions violations are considered a strict liability offense. While the consequences of willful criminal behavior may be more severe, civil violations do not require proof of intent or negligence. On the other hand, evidence of intent to comply (that may include internal compliance systems and training) may be seen as mitigating factors during the sentencing phase. (We can, of course, assist you with this.)
Yet despite the catastrophic consequences of violations, “[m]any small and middling Western firms are ‘spectacularly ill equipped’ to conduct the required due diligence on business partners, counterparties or supply chains . . . .” How can you ensure that your company complies with economic sanctions regimes? Check out my Instagram page which contains several videos about Sanctions Risks in your Supply Chain and the evolving situation of economic sanctions against Russia. Or, of course, call us today!